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Generation Rent left out in the cold

As more and more young people face being locked out of the housing market by soaring prices, it's time to acknowledge the obvious.

As more and more young people face being locked out of the housing market by soaring prices, it's time to acknowledge the obvious.

The roaring popularity of property investment - aided by generous tax breaks - is turning us into a nation of landlords. And this is inflicting a hefty toll on younger generations.

After first home buyers' share of new home loans fell to a record low of 12.5 per cent last week, it may be tempting to call for government action to boost the buying power of people trying to enter the market.

This is historically what governments have done, after all.

There are grants for buyers of newly built homes, subsidised savings accounts, and in some states, concessions on stamp duty. But while these policies help at the margins, they don't address the fundamental issue.

At the heart of it, first home buyers are competing with an army of people seeking more exposure to property as an asset class. This is inextricably linked to the surge in house prices that's pricing so many first home buyers out of the market.

How do we know this? Because the official figures show the recent spate of home loan growth has been driven by investors, a trend confirmed by real estate agents and mortgage brokers.

But don't just take my word for it. The last time auction clearance rates were hitting the peaks seen recently, the Reserve Bank itself also fingered investors as the most likely source of rapid house price growth.

"For every new dollar lent for housing purposes, around 40¢ now goes to investors - a figure much higher than we have ever experienced before," it said in 2003. In some ways, things are eerily similar today.

An economist who worked in the Reserve back then, HSBC's Paul Bloxham, says that in the last few months about 44.5¢ in every dollar lent out for housing has gone to investors. This is near its highest sustained level in a decade.

If we care about the fact that so many young people are struggling to get into the market, it's time to talk about the nation's love affair with property investment.

So just how property obsessed is Australia? In 2010-11, the latest year for which figures are published, there were more than 1.8 million landlords. That's about one in seven taxpayers. Of these people, some 480,000 owned or had a stake in two or more homes.

In a September speech, Bank of America Merrill Lynch chief economist Saul Eslake pointed out that not only has the number of tax-paying landlords increased by about 500,000 since the late 1990s, they're also losing much more money.

While landlords made a collective profit of $700 million in 1998-99, this had turned into a loss of $7.8 billion by 2010-11, due to much higher interest costs. Why has there been such an explosion in loss-making investors?

No, they're not financially illiterate. They're just exploiting Australia's unusually generous system of negative gearing - where investors deduct the costs of a rental property, such as loan repayments or water bills, against their income.

Since the Howard government slashed the rate of capital gains tax on assets held for more than a year, negative gearing has become far more generous to the investor, and much more popular. But despite its popularity, negative gearing is leading to some perverse outcomes.

By definition, it's a strategy that makes sense only if there are capital gains to compensate for the earlier losses. It rewards betting on rising asset prices, which in turn helps to make houses even less affordable for those not in the market.

Record low interest rates are highlighting these unfortunate side effects of a tax regime that rewards property speculation.

Rather than making property ownership more accessible, lower borrowing costs are attracting more bets from investors on future price rises, locking out thousands of first home buyers.

In its latest Financial Stability Review, the Reserve Bank also warned of the risks of increased "speculative" money coming into property from a period of low interest rates.

When first home ownership was the subject of the Productivity Commission inquiry in 2003, the RBA said the "most sensible" way to quell demand for homes was to look at the investor market, including putting negative gearing under the microscope.

The 2010 Henry Review also recommended negative gearing be scaled back, so landlords could deduct 40 per cent, rather than all, of their investment expenses.

Yet the then Labor government ruled out the idea in an instant, and it's not clear if the Coalition will include negative gearing in its first-term tax review. And that sums up the situation, really.

We know speculative investment is a key reason why housing is becoming more and more unaffordable. It is not a mystery. But when there are 1.8 million landlords who vote, tighter rules on property investment would be electoral poison.

If politicians were at all serious about easing first home buyers' pain they'd be open to debating these issues, but I wouldn't count on it.

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